The Bond Market Sweet Spot

[Kevin K.]

A typically excellent post from Cullen Roche. I especially appreciate his concept of "escape velocity" (the point where current coupon payments offset the interest rate risk). Makes me very glad I switched to using all 5 year Treasuries in my Golden Butterfly long ago.

https://disciplinefunds.com/2023/10/04/ ... weet-spot/

[vnatale]

A typically excellent post from Cullen Roche. I especially appreciate his concept of "escape velocity" (the point where current coupon payments offset the interest rate risk). Makes me very glad I switched to using all 5 year Treasuries in my Golden Butterfly long ago.

https://disciplinefunds.com/2023/10/04/ ... weet-spot/

You own individual and not bond funds, I'm almost 100% certain.

Any idea how the 5 year Treasuries funds did during 2022? And, this year?

[Kevin K.]

I have my ITT's in Schwab's SCHR ETF, which has an average duration of 5.6 years. Losses were
10.58% in 2022 and are 1.15% YTD. But I have half of my bond position in 3 and 6 month Tbills set on automatic rollover paying 5%+.

I'll move all but a couple of years worth of living expenses into SCHR when and if the Treasury yield curve stops being inverted.

[Kevin K.]

Also see Ben Carson's latest:

https://awealthofcommonsense.com/2023/1 ... -amateurs/

[vnatale]

Related to bonds .... this is somewhat related to this topic and, also, what mathjak has been telling us for years ....

Capturer.JPG (76.28 KiB) Viewed 24005 times

[Smith1776]

Above 5% today for the 30-year.

[Kevin K.]

Above 5% today for the 30-year.

Yeah, vs. 5.50% for 3 month bills and 5.58% for six month ones.

As the article vnatale shared points out, the losses in long treasuries are truly epic.

Cullen Roche, whose post I shared when I started this thread, refers to LTT's and gold as "insurance" investments and recommends no more than 10% in either of them. And this has been the problem with the PP all along: letting the appealing symmetry and simplicity of 4 x 25% dictate equal allocations to deal with economic circumstances that are in actuality a) not equally likely to occur, and (b) that have wildly different costs to insure against. This was of course also Bill Bernstein's argument against equal weighting in his book "Deep Risk."

People forget sometimes that the 4 x 25 wasn't the original PP anyway and seem to assume that Browne wouldn't have changed the allocation again in light of things like LTT's offering negative real returns for years on end, paper gold largely replacing physical, the ability to invest easily and cheaply in equity funds and ETF's far broader in their exposure than the S & P 500, etc.

[vnatale]

Above 5% today for the 30-year.

Yeah, vs. 5.50% for 3 month bills and 5.58% for six month ones.

As the article vnatale shared points out, the losses in long treasuries are truly epic.

Cullen Roche, whose post I shared when I started this thread, refers to LTT's and gold as "insurance" investments and recommends no more than 10% in either of them. And this has been the problem with the PP all along: letting the appealing symmetry and simplicity of 4 x 25% dictate equal allocations to deal with economic circumstances that are in actuality a) not equally likely to occur, and (b) that have wildly different costs to insure against. This was of course also Bill Bernstein's argument against equal weighting in his book "Deep Risk."

People forget sometimes that the 4 x 25 wasn't the original PP anyway and seem to assume that Browne wouldn't have changed the allocation again in light of things like LTT's offering negative real returns for years on end, paper gold largely replacing physical, the ability to invest easily and cheaply in equity funds and ETF's far broader in their exposure than the S & P 500, etc.

Not to go off topic .... but your last two paragraphs do seem to provide the seque to ....

.....is the Permanent Portfolio still a valid investment strategy?

1) You point out that the 4 equal investments were not the original Permanent Portfolio. Its founder has now been dead for 16 years so he has been no longer with us to offer any more guidance.

2) Tex and Craig picked up his torch big-time by writing their book. But each of them have now seemingly turned their backs on the concept. That leaves the dwindling number of participants in this forum to provide any form of guidance, none who have either risen to the level of authority of a Harry Browne or even Tax or Craig. Any pure Permanent Portfolio participants also do not seem to have a frequent presence here. So there are no Moses's here to lead us out of the wilderness.

3) Looking for an effective investment strategy other than the Permanent Portfolio .... fortunately, we still have Bill Bernstein among us for, hopefully, at least another decade if not two or three. Plus, there are many others younger than him who fall into his camp of investing to which to look for guidance.

In sum, embracing the Permanent Portfolio at this point seems to be a difficult sell.

[Kevin K.]

Above 5% today for the 30-year.

Yeah, vs. 5.50% for 3 month bills and 5.58% for six month ones.

As the article vnatale shared points out, the losses in long treasuries are truly epic.

Cullen Roche, whose post I shared when I started this thread, refers to LTT's and gold as "insurance" investments and recommends no more than 10% in either of them. And this has been the problem with the PP all along: letting the appealing symmetry and simplicity of 4 x 25% dictate equal allocations to deal with economic circumstances that are in actuality a) not equally likely to occur, and (b) that have wildly different costs to insure against. This was of course also Bill Bernstein's argument against equal weighting in his book "Deep Risk."

People forget sometimes that the 4 x 25 wasn't the original PP anyway and seem to assume that Browne wouldn't have changed the allocation again in light of things like LTT's offering negative real returns for years on end, paper gold largely replacing physical, the ability to invest easily and cheaply in equity funds and ETF's far broader in their exposure than the S & P 500, etc.

Not to go off topic .... but your last two paragraphs do seem to provide the seque to ....

.....is the Permanent Portfolio still a valid investment strategy?

1) You point out that the 4 equal investments were not the original Permanent Portfolio. Its founder has now been dead for 16 years so he has been no longer with us to offer any more guidance.

2) Tex and Craig picked up his torch big-time by writing their book. But each of them have now seemingly turned their backs on the concept. That leaves the dwindling number of participants in this forum to provide any form of guidance, none who have either risen to the level of authority of a Harry Browne or even Tax or Craig. Any pure Permanent Portfolio participants also do not seem to have a frequent presence here. So there are no Moses's here to lead us out of the wilderness.

3) Looking for an effective investment strategy other than the Permanent Portfolio .... fortunately, we still have Bill Bernstein among us for, hopefully, at least another decade if not two or three. Plus, there are many others younger than him who fall into his camp of investing to which to look for guidance.

In sum, embracing the Permanent Portfolio at this point seems to be a difficult sell.

Nah, that's not off-topic at all - on the contrary I think you've hit multiple nails on the head, which I appreciate!

Like you and many others who've posted here over the years I was a big fan of Mssrs. Rowland and Lawson and their excellent book. I have no idea how either of them invest now or what they're up to but I certainly remain grateful to them both.

That said, for me anyway, Tyler at Portfolio Charts deserves a ton of credit for carrying Harry Browne's key insights forward in new and innovative ways, though his accomplishments go far beyond that. While Tyler is humble and would certainly demur, I think he's every bit the equal of folks like William Bernstein or Larry Swedroe, while being far more original and innovative in his thinking.

But you're right about this forum being kind of a ghost land anymore, with just a handful of us checking in from time to time. I suspect it's partly due to the PP only attracting attention during times of market meltdowns, and partly also to the (IMHO foolish) decision to include a lot of political discussions on the site that for the most part just confirm the popular mainstream perception that anyone who invests in gold or respects libertarians like Browne probably lived in a bunker in Idaho full of guns, ammo and MRE's and wears a tin foil hat under their MAGA cap. Oh well.

[Tortoise]

2) Tex and Craig picked up his torch big-time by writing their book. But each of them have now seemingly turned their backs on the concept. That leaves the dwindling number of participants in this forum to provide any form of guidance, none who have either risen to the level of authority of a Harry Browne or even Tax or Craig. Any pure Permanent Portfolio participants also do not seem to have a frequent presence here. So there are no Moses's here to lead us out of the wilderness.

I don't think Craig and Tex have turned their backs on the PP concept, at least based on what they said the last time each of them stopped by the forum.

When Craig stopped by in July 2020, he said he's still invested in the PP.

And when Tex stopped by in March 2022, he also said he's still invested in the PP.

So they haven't turned their backs on the PP; they just grew tired of discussing the concept ad nauseum on this forum and decided to refocus their time and attention on other endeavors.

In sum, embracing the Permanent Portfolio at this point seems to be a difficult sell.

Yeah, it is. Although the PP concept stands on its own, it really helps to have smart, eloquent apologists like Harry, Craig, and Tex who keep the concept relevant and fresh by continually discussing it in the context of ever-changing economic and political events.

I'm one of the few people on this forum who is still fully invested in the 4x25 PP, but I admit that the past couple of years have started to make even me start to question the strategy's underlying assumptions.

[vnatale]

Above 5% today for the 30-year.

Yeah, vs. 5.50% for 3 month bills and 5.58% for six month ones.

As the article vnatale shared points out, the losses in long treasuries are truly epic.

Cullen Roche, whose post I shared when I started this thread, refers to LTT's and gold as "insurance" investments and recommends no more than 10% in either of them. And this has been the problem with the PP all along: letting the appealing symmetry and simplicity of 4 x 25% dictate equal allocations to deal with economic circumstances that are in actuality a) not equally likely to occur, and (b) that have wildly different costs to insure against. This was of course also Bill Bernstein's argument against equal weighting in his book "Deep Risk."

People forget sometimes that the 4 x 25 wasn't the original PP anyway and seem to assume that Browne wouldn't have changed the allocation again in light of things like LTT's offering negative real returns for years on end, paper gold largely replacing physical, the ability to invest easily and cheaply in equity funds and ETF's far broader in their exposure than the S & P 500, etc.

Not to go off topic .... but your last two paragraphs do seem to provide the seque to ....

.....is the Permanent Portfolio still a valid investment strategy?

1) You point out that the 4 equal investments were not the original Permanent Portfolio. Its founder has now been dead for 16 years so he has been no longer with us to offer any more guidance.

2) Tex and Craig picked up his torch big-time by writing their book. But each of them have now seemingly turned their backs on the concept. That leaves the dwindling number of participants in this forum to provide any form of guidance, none who have either risen to the level of authority of a Harry Browne or even Tax or Craig. Any pure Permanent Portfolio participants also do not seem to have a frequent presence here. So there are no Moses's here to lead us out of the wilderness.

3) Looking for an effective investment strategy other than the Permanent Portfolio .... fortunately, we still have Bill Bernstein among us for, hopefully, at least another decade if not two or three. Plus, there are many others younger than him who fall into his camp of investing to which to look for guidance.

In sum, embracing the Permanent Portfolio at this point seems to be a difficult sell.

Nah, that's not off-topic at all - on the contrary I think you've hit multiple nails on the head, which I appreciate!

Like you and many others who've posted here over the years I was a big fan of Mssrs. Rowland and Lawson and their excellent book. I have no idea how either of them invest now or what they're up to but I certainly remain grateful to them both.

That said, for me anyway, Tyler at Portfolio Charts deserves a ton of credit for carrying Harry Browne's key insights forward in new and innovative ways, though his accomplishments go far beyond that. While Tyler is humble and would certainly demur, I think he's every bit the equal of folks like William Bernstein or Larry Swedroe, while being far more original and innovative in his thinking.

But you're right about this forum being kind of a ghost land anymore, with just a handful of us checking in from time to time. I suspect it's partly due to the PP only attracting attention during times of market meltdowns, and partly also to the (IMHO foolish) decision to include a lot of political discussions on the site that for the most part just confirm the popular mainstream perception that anyone who invests in gold or respects libertarians like Browne probably lived in a bunker in Idaho full of guns, ammo and MRE's and wears a tin foil hat under their MAGA cap. Oh well.

One point of agreement and another of disagreement.

Tyler in all his humbleness is, Yes, an extreme gem.

I do enjoy that this forum does allow political discussions as I participate in them. Though this forum has an obvious focus I do enjoy, in general, discussing other topics of interest with people I "know". Seems like if one does not enjoy the political topics that they are easy enough to skip over the same way I do with anything related to crytpo currencies.

[Smith1776]

Yeah I wonder what Craig and Tex would be saying today.

One of the reasons why the PP performed so admirably the last time we were in a comparable period was because gold went through the roof.

The world may be different, and Browne is not here to update his philosophy. As per Saifedean Ammous, gold has been experiencing an ever diminishing role as global money, and Bitcoin is rising. The difference is that when we were on a gold standard the Internet did not exist. People did not have an expectation of things happening instantly. They do now, and gold's encumberances may be unacceptable today. On the other hand, Bitcoin hasn't exactly exploded in price in response to the recent inflation either.

As for long bonds, the idea that they should be bought at any price has clearly caused pain to anyone that was a diehard adherent.

However, if you're using the PP, the best thing to probably do is stay the course and rebalancing INTO them.

Despite all the negative talk I've engaged in above, the counterargument is actually still very strong for the PP.

Compared to a conventional conservative portfolio in Portfolio Visualizer, going back as far as I can, the PP has delivered nearly identical absolute returns, but with a fair bit less risk. For all the turmoil, I think the PP has been showing very admirable performance.

pp.jpg (145.11 KiB) Viewed 23958 times

Blue line is the PP. Even with the bond market rout, the PP appears to be doing just fine.

EDIT: spelling

[Kevin K.]

Yeah I wonder what Craig and Tex would be saying today.

One of the reasons why the PP performed so admirably the last time we were in a comparable period was because gold went through the roof.

The world may be different, and Browne is not here to update his philosophy. As per Saifedean Ammous, gold has been experiencing an ever diminishing role as global money, and Bitcoin is rising. The difference is that when we were on a gold standard the Internet did not exist. People did not have an expectation of things happening instantly. They do now, and gold's encumberances may be unacceptable today. On the other hand, Bitcoin hasn't exactly exploded in price in response to the recent inflation either.

As for long bonds, the idea that they should be bought at any price has clearly caused pain to anyone that was diehard adherent.

However, if you're using the PP, the best thing to probably do is probably stay the course and rebalancing INTO them.

Despite all the negative talk I've engaged in above, the counterargument is actually still very strong for the PP.

Compared to a conventional conservative portfolio in Portfolio Visualizer, going back as far as I can, the PP has delivered nearly identical absolute returns, but with a fair bit less risk. For all the turmoil, I think the PP has been showing very admirable performance.


pp.jpg


Blue line is the PP. Even with the bond market rout, the PP appears to be doing just fine.

Thanks for this.

What's the "conventional conservative portfolio" you used?

[Smith1776]

Thanks for this.

What's the "conventional conservative portfolio" you used?

Just the portfolio labeled as "Conservative Portfolio" included in Portfolio Visualizer as a default option. It appears to be a globally diversified portfolio of stocks and bonds at 40/60.

[whatchamacallit]

I was kind of thinking along the same lines Smith. How has a total bond fund compared with a barbell of long bond and cash. Not a crazy difference:

Screenshot 2023-10-06 5.05.16 PM.png (183.11 KiB) Viewed 23930 times

Portfolio 1 is total bond fund, Portfolio 2 is barbell with annual re balancing. No re balancing was a little worse at -0.91 CAGR.

https://www.portfoliovisualizer.com/bac ... tion3_2=50

[Kevin K.]

Thanks for this.

What's the "conventional conservative portfolio" you used?

Just the portfolio labeled as "Conservative Portfolio" included in Portfolio Visualizer as a default option. It appears to be a globally diversified portfolio of stocks and bonds at 40/60.

Thanks!

So here's a comparison of the PP with plain vanilla 60:40 and 50:50 TSM and ITT's. Adding international stocks doesn't make a whole lot of difference. But both of these conservative portfolios had substantially better risk-adjusted returns.

https://www.portfoliovisualizer.com/bac ... tion6_3=50

[Kevin K.]

And for a real eye opener check out what happens if you take a page from the Golden Butterfly and make the stocks half TSM half SCV.

Who needs gold or LTT's?

https://www.portfoliovisualizer.com/bac ... tion7_1=25

[barrett]

Not a bond expert at all, but...

The concept of escape velocity is pretty simple, at least as explained in the article Kevin provided in the first post. But the issue I have with the concept as presented is that long duration bonds will always remain unattractive (when just considering escape velocity) unless yields get up to 15%-16% or so, right?

Here is the current data for TLT:

https://www.ishares.com/us/products/239 ... y-bond-etf

So with an effective duration of 16.34, a rise in interest rates of 1% means (very roughly) a loss of 16%. Is Roche effectively saying that 30-year bonds as advocated by HB remain too risky until they have a "positive" escape velocity?

I am probably oversimplifying what he has written but a suggestion of an entry point would obviously add a lot of value to the article. I mean something along the lines of this that Kevin wrote:

"I'll move all but a couple of years worth of living expenses into SCHR when and if the Treasury yield curve stops being inverted."

Finally, we seem to quickly be getting to the point where the yield curve will no longer be inverted. Not sure what to do with that information but yields certainly do seem to be trending in a direction where the longer end of the curve may soon yield higher than the shorter end.

Thoughts?

[Smith1776]

I think the escape velocity concept has merit.

More broadly, I think that the Rational Reminder episode on bonds really highlighted how adjusting one's position based on what's actually being offered by credit spreads and the yield curve makes sense.

The issue is that these things require time, expertise, and in the case of active management costs money, which may evaporate the benefit.

My solution in the ATP (see sig) is to opt for a globally diversified ladder of government bonds that has a roughly intermediate maturity. I have no inclination to start actively trading based on what the yield curve is offering so I've decided to simply compromise and say "okay, intermediate is good enough".

[Kevin K.]

Thanks barrett and Smith1776 for your thoughtful comments.

I think the allocation in the ATP makes a great deal of sense. Intermediate duration has historically been the risk:return sweet spot for bonds; it's just that bond fund managers have stretched the definition of "intermediate" in recent years (pushing Total Bond Market duration out to nearly 8 years from the 5 year historical definition of of intermediate [per Annette Thau]).

The classic PP barbell results in a duration of over 11 years, which was great for ~40 years when we had that bond market tailwind, but is very risky now. Combined with a 25% bet on stocks whose returns are entirely dependent on a handful of FAANG stocks and another 25% in an asset with no inherent rate of return subject to frequent decade+ periods of going nowhere and you have a recipe for "meh" mediocrity that is nowhere near as robust in times of market panics as it used to be. Bob Clyatt (of "Work Less, Live More" fame) refers to the PP as a "bunker" but these days it's an unlocked bunker that's sprung a few leaks.

Here's an excerpt from an email from Cullen Roche when I asked him about how he would design an alternative to the PP or Tyler's idea of Wellesley with 20% gold for a risk-averse retiree like myself. If you're not familiar with his DSCF ETF you'll probably want to read a bit about it (see link below) but for purposes of understanding his thinking you could just substitute a moderate (~60:40 equity:bond, globaly diversified) for DSCF in his discussion:

"Please let me know if you have any questions about the fund. I typically use it [DSCF} as a core component within a core and satellite approach within my "All Duration" approach. I've always liked "lazy portfolios", but the problem there is they don't always bucket allocations in a sensible manner which creates a lot of uncertainty. Specifically, I'd argue that 20% in long-term bonds is way too much. Long bonds and gold are like insurance in a portfolio. Your portfolio should never be comprised of 40% insurance. Instead, I'd bucket it out with more T-Bills and something like VGSH for the short-term bonds. Then apply DSCF, VTI and smaller allocations to IAU or VGLT for insurance. For instance:

10% 6 month T-Bills (just keep rolling them every 6 months)
20% VGSH (short-term govt bonds yielding 4%)
30% DSCF (tax efficient stock/bond mix)
20% VTI (stocks)
10% VGLT
10% IAU/PHYS

This portfolio gives you a ton of short-term certainty with broad diversification on some longer-term instruments.  You end up with the same stock exposure as Wellesley has, but you have more insurance, liquidity and protection built into the portfolio."

https://disciplinefunds.com/what-is-the ... line-fund/

[vnatale]

Thanks barrett and Smith1776 for your thoughtful comments.

I think the allocation in the ATP makes a great deal of sense. Intermediate duration has historically been the risk:return sweet spot for bonds; it's just that bond fund managers have stretched the definition of "intermediate" in recent years (pushing Total Bond Market duration out to nearly 8 years from the 5 year historical definition of of intermediate [per Annette Thau]).

The classic PP barbell results in a duration of over 11 years, which was great for ~40 years when we had that bond market tailwind, but is very risky now. Combined with a 25% bet on stocks whose returns are entirely dependent on a handful of FAANG stocks and another 25% in an asset with no inherent rate of return subject to frequent decade+ periods of going nowhere and you have a recipe for "meh" mediocrity that is nowhere near as robust in times of market panics as it used to be. Bob Clyatt (of "Work Less, Live More" fame) refers to the PP as a "bunker" but these days it's an unlocked bunker that's sprung a few leaks.

Here's an excerpt from an email from Cullen Roche when I asked him about how he would design an alternative to the PP or Tyler's idea of Wellesley with 20% gold for a risk-averse retiree like myself. If you're not familiar with his DSCF ETF you'll probably want to read a bit about it (see link below) but for purposes of understanding his thinking you could just substitute a moderate (~60:40 equity:bond, globaly diversified) for DSCF in his discussion:

"Please let me know if you have any questions about the fund. I typically use it [DSCF} as a core component within a core and satellite approach within my "All Duration" approach. I've always liked "lazy portfolios", but the problem there is they don't always bucket allocations in a sensible manner which creates a lot of uncertainty. Specifically, I'd argue that 20% in long-term bonds is way too much. Long bonds and gold are like insurance in a portfolio. Your portfolio should never be comprised of 40% insurance. Instead, I'd bucket it out with more T-Bills and something like VGSH for the short-term bonds. Then apply DSCF, VTI and smaller allocations to IAU or VGLT for insurance. For instance:

10% 6 month T-Bills (just keep rolling them every 6 months)
20% VGSH (short-term govt bonds yielding 4%)
30% DSCF (tax efficient stock/bond mix)
20% VTI (stocks)
10% VGLT
10% IAU/PHYS

This portfolio gives you a ton of short-term certainty with broad diversification on some longer-term instruments.  You end up with the same stock exposure as Wellesley has, but you have more insurance, liquidity and protection built into the portfolio."

https://disciplinefunds.com/what-is-the ... line-fund/

Thanks for this!

Loved: "it's an unlocked bunker that's sprung a few leaks".

Also, the Cullen Roche portfolio looks intriguing.

[whatchamacallit]

Kevin had me second guessing gold in this thread but after the news out of Israel today I believe it still has a place as the chaos asset.


The option I have been using for bonds is GOVT. It is a total us treasury fund similar to a total bond fund that holds all the maturities based on market cap. Long bonds are currently a small portion so it's duration is a tad longer but very close to intermediate treasury fund. Seems like a logical fund to be agnostic on duration.

Now that longer maturities have some meat to them I am thinking of moving to splitting portfolio into thirds. Total us stock/gold/GOVT

This portfolio compares nicely to 50/50 stock/intermediate treasury but also holds the chaos asset.

Then have comfortable amount of cash outside of retirement accounts which gets it back close to standard permanent portfolio in reality.

[Kevin K.]

GOVT looks like a really good ETF; thanks for letting us know about it. I really like the fact that it automatically rebalances its holdings by market cap so that the effective duration changes according to the market.

I like your phrase "chaos asset" for gold, and I suppose that would also apply to a considerable degree to long-term Treasuries. But in both cases save-your-bacon performance is far from guaranteed, as we've seen repeatedly over the past 2-3 years - and as is even more evident when you look at larger periods of market history.

I was just revisiting this piece from ERN @ Early Retirement Now:

https://earlyretirementnow.com/2020/01/ ... s-part-34/

He discusses gold in the PP, All Seasons and GB towards the end of the piece. Bottom line seems to be that 10-15% gold (taken out of equities) can help with sequence-of-returns risk during retirement but that's about it. Which is pretty close to what Cullen Roche's 10% max in "insurance" assets (gold, LTT's). ERN's comments about the longer-term performance of the PP, and about the GB only doing slightly better due to having SCV, are perhaps worth thinking about too.